EIR 2015 – Reform of secondary insolvency proceedings

A focal point of the reform of the European Insolvency Regulation (EIR) is the revision of the provisions regarding secondary insolvency proceedings. As before, these proceedings pursue two objectives, i.e. protecting creditors in this country and supporting the main insolvency proceedings. However, the body issuing the reform regulation took account of practical experiences when dealing with the European Insolvency Regulation (2000/1346) and the criticism made of these proceedings in many cases. Above all, the secondary insolvency proceedings were pilloried on the grounds that they impede restructuring, since secondary insolvency proceedings must necessarily be liquidation proceedings. The European body issuing the reform regulation is not only abolishing this restriction but is also engaging at various points in order to solve the problems that arise on commencement of secondary insolvency proceedings for the restructuring of an enterprise as a whole.

1. Avoidance of the commencement of secondary insolvency proceedings by means of “synthetic” secondary insolvency proceedings

In order to contain the commencement of secondary insolvency proceedings in so far as is possible and to defuse potential conflicts, in Article 36 of Regulation (EU) 2015/848 the European regulator introduces the option of “synthetic” secondary insolvency proceedings. The main insolvency practitioner shall make local creditors an undertaking to place them in the same position as they would be in during the course of secondary insolvency proceedings; this is intended by the regulator to prevent the commencement of secondary insolvency proceedings or to make it significantly more difficult for the creditors to commence such proceedings. The English proceedings involving Collins & Aikmann, MG Rover and Nortel Networks served as a model.

a) Requirements

The undertaking shall be made in the official language of the Member State where secondary insolvency proceedings could have been opened and relates only to the assets located in this State. It shall be made in writing and shall be subject to any other requirements relating to form and approval requirements as to distributions, if any, of the State of the opening of the main insolvency proceedings. In the Act implementing Regulation (EU) 2015/848 on insolvency proceedings that was passed by the German Bundestag on 27 April 2017 (and is hereinafter referred to as the Introductory Act to the Insolvency Code), Article 102c(11)(1) states in this regard that in the event of main insolvency proceedings being commenced in Germany the insolvency practitioner must obtain the approval of the creditors’ committee or of the preliminary creditors’ committee, if such a committee has been appointed, in accordance with section 21(2)(1)(1a) of the Insolvency Code prior to issuing an undertaking. If a creditors’ committee has been appointed, its approval is a precondition in order for an undertaking to be valid. Pursuant to Article 36(5), the undertaking shall be approved by the known local creditors. The rules on qualified majority and voting that apply to the adoption of restructuring plans under the law of the Member State where secondary insolvency proceedings could have been opened also apply here. If the commencement of secondary insolvency proceedings in Germany is to be avoided, Article 102c(17)(1) of the Introductory Act to the Insolvency Code provides that the insolvency practitioner in the main insolvency proceedings shall conduct the vote on the undertaking in accordance with the provisions on the approval of insolvency plans (sections 222, 243, 244(1) and (2), 245, 246 of the Insolvency Code); the provisions on judicial confirmation of insolvency plans are not applicable. The insolvency practitioner shall inform the local creditors of the undertaking, of the rules and procedures for its approval, and of the approval or rejection of the undertaking. Once an undertaking has been given, the insolvency practitioner must also inform local creditors about the intended distribution prior to distributing the assets and proceeds of the assets covered by the undertaking.

b) Effects of an approved undertaking

Article 36 provides various legal remedies and possible sanctions for the benefit of the local creditors. These creditors may challenge the distribution intended by the main insolvency practitioner before the courts of the Member State in which main insolvency proceedings have been opened in order to obtain a distribution in accordance with the terms of the undertaking and the applicable law. No distribution shall take place until the court has taken a decision on the challenge. In addition, they are authorised to apply to the courts of the Member State in which main insolvency proceedings have been opened, in order to require the insolvency practitioner to take any suitable measures necessary to ensure compliance with the terms of the undertaking available under the law of the State of the opening of main insolvency proceedings. They may also apply to the courts of the Member State in which secondary insolvency proceedings could have been opened in order to require the court to take provisional or protective measures to ensure compliance by the insolvency practitioner with the terms of the undertaking. This legal protection is accompanied by the local creditors’ option to claim damages from the insolvency practitioner in the event of infringements of the undertaking that was given and the provisions of Article 36(10).

If a binding undertaking exists, the opening of secondary insolvency proceedings in the Member State in question is not prohibited per se. Nevertheless, any party entitled to do so under Article 37(1) may request the opening of such proceedings; this includes local creditors who approved an undertaking. Where a binding undertaking exists, the request for opening secondary insolvency proceedings in accordance with Article 37(2) shall be lodged within 30 days of having received notice of the approval of the undertaking. Pursuant to Article 38(2), a court seised of a request to open secondary insolvency proceedings shall, at the request of the insolvency practitioner, not open secondary insolvency proceedings if it is satisfied that the undertaking adequately protects the interests of local creditors. If secondary insolvency proceedings are opened despite an undertaking having been given, the insolvency practitioner in the main insolvency proceedings must surrender to the insolvency practitioner in the secondary insolvency proceedings assets that the former removed from the territory of the secondary insolvency proceedings after the undertaking was given, or must surrender the proceeds to the insolvency practitioner in the secondary insolvency proceedings if the assets have already been realised.

Although even the introduction of synthetic insolvency proceedings should in principle be welcomed, it appears very doubtful whether the mechanism foreseen by the regulator will prove to be practicable in view of the onerous and lengthy route involving in voting and the considerable liability risks on the part of the main insolvency practitioner. It is also regrettable that once an approved undertaking exists it has not been declared impermissible to make a request to open secondary insolvency proceedings.

2. No restriction to liquidation proceedings

The body issuing the reform regulation is abolishing the restriction of secondary insolvency proceedings to liquidation proceedings. Within the scope of Regulation (EU) 2015/848, secondary insolvency proceedings may be opened in all types of proceedings that are available in the relevant opening State, i.e. including in the form of reorganisation proceedings. Concomitantly, Article 38(4) provides that, at the request of the insolvency practitioner in the main insolvency proceedings, the court dealing with a request to open secondary insolvency proceedings may open the secondary insolvency proceedings in a type of insolvency proceedings as listed in Annex A other than the type initially requested, provided that that type of proceedings is the most appropriate as regards the interests of the local creditors and coherence between the main and secondary insolvency proceedings. Article 51 provides for a parallel arrangement in which, at the request of the insolvency practitioner in the main insolvency proceedings, in ongoing secondary insolvency proceedings the proceedings may be converted into another type of insolvency proceedings listed in Annex A. The insolvency practitioner is thus permitted to coordinate the two sets of proceedings by exerting influence on the appropriate type of proceedings.

3. Stay of the opening of secondary insolvency proceedings

Article 38(3) accords the main insolvency practitioner another possible way of protecting himself or herself from the opening of secondary insolvency proceedings by requesting that the opening of secondary insolvency proceedings be stayed for up to three months, provided that the interests of local creditors are protected. The prerequisite is that in the State of the main insolvency proceedings debt settlement proceedings are pending within the scope of which individual enforcement measures are temporarily stayed. The court, at the request of the main insolvency practitioner, may stay the opening of secondary insolvency proceedings for a period not exceeding 3 months, provided that suitable measures are simultaneously in place to protect the interests of local creditors. The court seised of a request to open secondary insolvency proceedings is authorised itself to order protective measures to protect local creditors. After the period of the stay has elapsed, the court must decide on the request to open secondary insolvency proceedings.

4. Strengthening of cooperation and communication

The creation of the option to open secondary insolvency proceedings in all types of proceedings that are available in the relevant opening State, i.e. including in the form of reorganisation proceedings that involve a special need for coordination, is accompanied by the expansion of options for cooperation and communication.

Thus, Article 38(1) obliges a court seised of a request to open secondary insolvency proceedings immediately to inform the main insolvency practitioner and give him or her an opportunity to be heard on the request. The latter is enabled to react to a submitted request to open secondary insolvency proceedings and inform the court about the actual conditions, in particular about the existence of a subsidiary in the secondary insolvency proceedings State or about the existence of an undertaking. In addition, the practitioner is enabled for the first time to exercise his or her above-described rights pursuant to Article 38(2) to (4).

While European Insolvency Regulation (2000/1346) envisages options for cooperation and communication only in the relationship between the main insolvency practitioner and secondary insolvency practitioner, in Articles 41 to 43 of European Insolvency Regulation (2015/848) these options are not only extended but also expanded to cover the relationship between the courts and between courts and insolvency practitioners. Article 41 of European Insolvency Regulation (2015/848), which standardises the obligations to cooperate in the relationship between the insolvency practitioners, builds on Article 31 of European Insolvency Regulation (2000/1346), but in addition makes important clarifications, such as the possibility of cooperation by concluding protocols between the insolvency practitioners; the legitimacy of these was disputed within the scope of Article 31 of EIR (2000). The content of the obligation to cooperate that is standardised as a principle in Article 41(1) of EIR 2015 is specified in Article 41(2) to the effect that in addition to a mutual obligation to communicate information to each other (a), the insolvency practitioners shall explore the possibility of restructuring and coordinate the elaboration and implementation of restructuring plans (b) and coordinate the administration of the realisation or use of the debtor’s assets and affairs (c). This obligation to cooperate exists to the extent that cooperation is compatible with the rules applicable to each type of proceedings.

Article 42(1) now provides that the courts are obliged to cooperate to the extent that such cooperation is not incompatible with the rules applicable to each of the proceedings. Coordination in the appointment of insolvency practitioners and in supervision of the debtor’s assets and affairs are stated as examples of cooperation. To handle cooperation between courts, the courts may appoint an independent person or body.

In Article 43, the duties of cooperation between the insolvency practitioners on the one hand and the courts on the other hand that are envisaged in Articles 41 and 42 are extended to the obligation of cooperation and communication between the insolvency practitioners and courts. In a nuanced provision, it is envisaged that the insolvency practitioners in all insolvency proceedings opened as main, secondary and territorial insolvency proceedings in respect of the same debtor shall cooperate and communicate with all the courts in a Member State before which a request to open main, secondary or territorial insolvency proceedings regarding the assets of this debtor is pending or which have opened such proceedings. The authorisation and obligation to cooperate and communicate exist only to the extent that such cooperation and communication are not incompatible with the rules applicable to each of the proceedings and also that no conflicts of interest exist.

Ellen Delzant, Attorney at Law in Germany and France

The cooperation and communication obligations envisaged in Articles 41 to 43 partially correspond to the provisions envisaged in Articles 56 to 58 for group insolvencies. The new regulations on insolvency proceedings for groups of companies form the subject of our next newsletter.

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